Looking to step into a money suck that will eat your time and leave you exhausted and penniless? Here’s how. These business ideas all look like short cuts or at least, like winners anyone can ride to the finish line. In reality, there’s no such thing. Every one of these business ideas requires more know-how (and, yes, often more up-front money) than you’d think at first glance. Let’s look a little closer.
1. A Franchise
It’s a well-oiled machine, right? All you have to do is step in and start reaping the profits.
The trouble with this is, it’s a well-oiled machine that makes money for the entity that grants the franchise. The franchisor is getting paid whatever happens. For the franchisee, it’s a much riskier proposition.
You might be stepping into a business that barely makes a profit, and the opportunity for expansion might not really be there. If there’s no market in the area, your franchise can’t grow. That leaves you on the hook for making an unworkable thing work. You can end up having a very difficult job, with all the downsides of business ownership and none of the opportunities for success.
(This video is specific to McDonald’s, but many businesses have similar requirements.)
Don’t buy a franchise if:
- You need your new business to pay out next month, this is the wrong choice for you.
- Your spouse isn’t on board. Getting a franchise off the ground will require a team effort.
- It’s your first business. Making franchises pay requires well-rounded business skills.
2. A Restaurant
Everyone eats. A restaurant should be a guaranteed moneymaker. And there’s more opportunity than you’d think. Around one American small business in 77 is a restaurant, and about 70% of them are single-unit operations, not chains. So it’s not a totally saturated market.
You can succeed in the restaurant business. But you have to know both sides — the restaurant side and the business side. And starting up a new restaurant is tough: you have rock-bottom-price fast food chains, food trucks and lower-priced ethnic cuisines to compete with, as well as your potential customers’ already-established tastes. Tempting them away from their usual haunts might take a while. Don’t start a restaurant unless you can afford to wait while you build your customer base.
Don’t start or buy a restaurant if:
- You love food or love to cook, but have no business experience. Restaurants run on tight profit margins and require business knowledge.
- You don’t fully understand why it’s for sale. Make sure you see the paperwork and get a real handle on the tax and legal situation, not just profit and loss.
- Location and reputation. Where a restaurant is can have nearly as much effect as what it is.
- What you’re buying. If you get the premises but not the menu or the chef, is it still worth it?
3. A Commoditized Business
Products and services start out as one-of-a-kind and end up as interchangeable units, shaped by the competing pressures of user needs and producer priorities until they all work more or less exactly the same. (Notice how cars all look alike now…) If you’re in a business where what you offer is specialist and can’t be replicated easily, customers will often happily pay higher prices. But by the time what you sell has become fully commoditized, you’ll face serious difficulties selling it for a good price.
When mobile phones were a new phenomenon, companies would charge you by call time and per text message. (That’s where the ‘r u l8?’ text-speak evolved from: trying to cram everything into one text message so you didn’t have to pay for another.) But now, calls and texts are free with your monthly plan. They’re fully commoditized. One power company doesn’t have better electricity than another, it’s all the same. For most purposes, the same is true of electronics supplies, batteries, nails and millions of other items. So what do you shop for? Availability, reputation, reliability, customer service, and price.
If you’re just getting started, which of those can you offer? A commoditized business is up against behemoths in the space, strong price pressure, logistical challenges and major overheads.
This is a great video about differentiation in commoditized businesses :
Before you enter a commoditized business, ask:
- How can you differentiate? Can you add value through making what you offer more personalized or a better user experience?
- Are you OK with operating a business with high volume and low margins, with little scope for improvement?
- Can you move sufficient volume to reap the benefits of low-cost marketing and sales that typically go with commoditized products at scale? If not, you could face being outcompeted a cent at a time by larger companies that can access those benefits.
4. A Shrinking Sector
There will always be a market for physically printed posters. Even super-antiquated businesses live on — you can still get camera film developed, still buy metal type for printing presses, and art shops still sell vellum and quill pens. There’s a market for VHS tapes. Nothing ever actually dies.
But some older business models sure do bottleneck down a bit. Established businesses might survive, or they might simply be too big and cumbersome to fit into their new niche. But new businesses will have a tough time fighting against going concerns that already have a rep, relationships, and an order book. Think about which way your business sector is trending before you jump in. Even a business that can initially show growth might face troubles down the line as the market shrinks, leaving too many enterprises scrabbling for remaining customers. Better to start in a sector with solid growth potential.
Before you enter a shrinking business sector, ask:
- Can you innovate or pivot? Can you offer a ‘better mousetrap’ or are you stuck competing against incumbents for fewer and fewer customers?
- Is there a niche within the industry that you can make your own and thrive in?
- Do you have the skills, the network, and/or the hustle to compete on marketing, sales and elbow grease alone?
5. A Specialist Business… That’s Not Specialist Enough
You can make a specialist business into a money printer if it’s the right kind of product or service. Niches become virtual monopolies automatically, so even if the market is small, if you’re the only game in town, you get all of it. Think of old-fashioned watch repair shops. They never seem to get bigger — or smaller. There’s not much business, but the Venn diagram of people who want their watch fixed and people who go there to have it done is a perfect circle.
You can also make a decent go of a business that’s all things to all people. All you gotta do is sell it cheaper, nicer, or easier. Walmart will sell you a whole house of furniture and a house to put it in. To set up opposite a Walmart you need to beat them on nice, price, or easy, by a significant margin.
That’s the rub.
A truly specialized business sells something they don’t have at Walmart. Walmart will sell you a kitchen knife, but not a hand-made, watered-steel Japanese kitchen knife. That’s a niche product. Selling dairy products over the road from a general store? They better be unique somehow, and you better know people want them before you put money down on plant and premises.
Don’t step into a specialized business niche unless:
- You know the specific niche inside and out. If you’re selling specialist equipment, tools, foods or anything else, your customers will be enthusiasts with deep, broad knowledge. Be ready to match it.
- You believe there is enough of a market to support your business — enough people who are interested in spending money, not just interested.
- You have a way to grow your market if what you sell is one-off or each customer will only buy a few times.
6. Anything With AI, Blockchain, Or Wi-Fi In It
…not that there’s necessarily anything wrong with these technologies. But every time a new technology comes out, it goes through a period where the name of the technology just means ‘cool, new, and magic.’ During that time, people will try out businesses that make no sense at all, so long as they can sneak in the magic cool thing somewhere. If it’s ‘like [already established business] but [cool tech],’ it’s worth asking: Does the world really want to pay for a wifi-enabled coffee machine? Does this AI-enabled toaster have a market, or just a buzzword attached? Is this… a JPEG?
Every time one of these tech hype cycles comes around, two things are certain: one is that some businesses based on it will survive and become normalized, and the other is that a ton of people will lose their shirts while the world figures out what the technology is really for. Don’t be one of them.
Before you put your money down, ask:
- How long has this been around, and has anyone in your position made repeatable, predictable profits from it?
- How exactly does it work? Don’t be swayed by phony tech talk, keep digging until you get a clear explanation.
- Would it work just as well without the special-sauce technology?
- How does your potential market view this type of product?
7. Real Estate
…if you’re not a broker or an agent. Real estate investment is always being sold as a moneymaker — everyone needs somewhere to live, so real estate means money in the bank. But you’re not a bank. Buying and renting out homes can strangle you in red tape and drown you in financial obligations, because every time something goes wrong, fixing it is your responsibility.
Tenants can’t pay or won’t pay. Locations rise and fall in value. Property decays and is subject to damage. And that’s before you consider the property and the business environment. Buying and selling houses, whether you’re renting, flipping or what, is a business skill in itself.
If you don’t have significant financial resources and you don’t have the skills, tools, time and energy to do a significant amount of the work yourself, don’t fall for the idea that real estate investment is an easy path to wealth. It can be a viable one — check out this video for a relatively deep, but very informative dive into the nitty-gritty of real estate investment in 2023 and beyond:
If you’re thinking of making a real estate investment, hold off a while until you have good answers to these questions:
- Can you work on your investment property to add value before rental or resale?
- If you’re buying directly, do you have the information you need? It’s a good idea to get your own surveying done, for instance.
- If you’re buying through a management company or other structure, do you have enough insight into them and their business to know they’re trustworthy?
8. Fad Products
If you remember those, you remember how they came, conquered — and disappeared without trace. In the intervening time, a lot of people made bank on the fad. But quite a few other people stepped on board just a moment too late and wound up holding a garage, warehouse, or storage unit full of unsaleable junk that no one was interested in and never would be again.
The thing about fads is (and this will be familiar if you have kids): for a while, it’s all anyone wants to talk about. Then, suddenly, just as quickly as it arrived and for no apparent reason, the fad is over. Superman wallpaper doesn’t fade from favor: it goes from cool to cringe instantly. Hula hoops, yoyos, and other fads follow the same progression. It’s not always loss of enthusiasm that kills a fad. This video does a great job of explaining what actually did kill off fidget spinners:
Don’t start a business on the basis of other people’s temporary enthusiasm. Look for something that will last. Key tip: think about what people need, not what they want.
Before you stake your future on today’s big thing, check:
- Who’s buying them, and how much of their income goes to them. If teenagers are spending $1.99 on something they’re not very heavily invested, suggesting a shortlived craze.
- Do they get a ton of mention in the press, even when the story isn’t really about them? That could be journalists reaching for relevance with a recent fad.
- Google Trends! What does the graph look like? Compare it to known fads (yes, like fidget spinners) and look for similarities. Explosive booms in interest usually fade equally fast.
Pyramid schemes. Ponzi schemes. Multi-level marketing. Anything where you’re trying to get other people to buy into the business is a dubious proposition. You’re promised the freedom to choose your own hours (and, it’s strongly implied, your own income: the sky’s the limit! We have people making [$$$]!). You’ll be your own boss. You’ll be a business person.
But a pyramid scheme works by robbing Peter to pay Paul. It’s a house of cards. You’re not really in charge, and you don’t really have much of a chance to reach the promised income level, unless you do one thing: recruit others to the pyramid scheme. That’s where the money is. So if someone approached you with wild promises and a request for up-front payment, tread warily. Chances are, you’re the product.
Think the business you’re eyeing is an MLM? Can you:
- Choose your own supplier? If your supplier chooses you, you don’t have a lot of wiggle room. You’re basically a salesperson, not a business owner
- See a clear path to profit using the actual business itself, not by recruiting others?
- Operate independently of the parent company? Or are you ‘locked in’?
10. Anything Financial You Don’t Understand
The wheels of financial law enforcement grind slow, but very fine. Right now, a parade of fintech companies is trooping through court to explain to the SEC exactly how their tokens and altcoins aren’t securities. As soon as you put a foot into the heavily regulated financial markets, you open yourself up to a world of red tape, with violations backed by criminal penalties in some cases. You don’t want to wind up illegally trading securities or carrying out wire fraud by accident. If a business has a financial component (in the sense of exposure to the financial markets; you kinda hope there’s going to be money involved at some point), be very careful. Seek qualified expert advice, and default to ‘no thanks.’
Before you get involved, ask:
- Which agency regulates this? Be very wary if no one knows or the answer is ‘none’.
- Where does the profit come from? If it’s ‘financial magic’ or it sounds like a Ponzi, it could well be.
- What happens to your capital if it all goes wrong?
11. A Taxi Business
To the untrained eye, a cab company sells drivers and cars, a little piece at a time. If you have a car and can drive, and you know some others in a similar position, you’d think it can’t go wrong. But it can, because that’s not the product. Availability and accuracy are the product.
What people want from a cab company is to be able to call a car, step into it five minutes later, and wind up where they want to be, first time. It’s a logistics and infrastructure business that’s heavily reliant on behind-the-scenes staff, particularly skilled and experienced dispatchers, and on effective marketing. Even companies that have complex apps doing the crunching of numbers and routes behind the scenes need significant capital to get there.
It’s not just a saturated market either. Big technology companies use a business model where they initially offer below-cost fares to establish market dominance, meaning you can’t price-match them and break even, let alone make a profit. If you’re in an urban area a cab business is going to be really, really tough.
Before you try to make a go of a cab company, consider:
- Does a rideshare app already have a presence in your town? What is the competition like?
- Do you have (or can you hire) expertise in dispatching, route planning, and logistics? (Even Google Maps can only do so much).
Great, so, what should you be doing?
Yes, really. In fact, any professional service that other business people really can’t do without. Every year, without fail, every business in America needs to do their taxes. Considering most small business owner’s feet don’t touch the floor from one year to the next, and considering that even in midsize firms there’s often no one who can confidently do financial returns or figure out exemptions and deductions, accounting and financial services is a good choice.
It’s not one that’s available to just anyone for obvious reasons, but the principle holds true: find something other business people need and can’t do themselves. Cleaning fits the bill. So does graphic design, marketing, coding and IT support. If it stops the business working when it breaks, start a business repairing it or keeping it working and you’ll never want for clients.
If you’ve read this far, you’ve probably noticed what all these business ideas have in common: no one really needs them, or there are already a ton of folks servicing the need that does exist (or both). That is, there’s no addressable market.
Figuring out whether your business idea has an addressable market is a specialty of Judicious, Inc. — along with the rest of a full suite of digital marketing for businesses. If you’ve read this post, given up on your dream of being a cabbie, real-estate mogul, or used fidget spinner dealer, talk with us about the next step.